Impact of GST on the Pharmaceutical industry

By Registrationwala

26th May 2017

The government of India sat together last week and the GST council announced rates for the Goods and Services tax on different pharmaceuticals, paving the way for the implementation of the historic Goods and Services Tax (GST) from July 1, 2017. In this article, we see the positive and negative effects of the GST move on the pharmaceutical industry.

Why is the Pharma Industry Important?

Like it is expected from a growing economy, the pharmaceutical industry in India is already big and is growing at a good rate. Currently, India supplies drugs to more than 200 economies in the world. It is the third largest in the world in terms of volume. And if you look closer, India is also the largest supplier of the generic drug medicines in the whole world. And this is expected to grow further, claiming major head start over the other players in the pharma market.

Currently, over 5 percent of GDP is contributed by the health sector, which is majorly reliant on the pharmaceutical industry. The government sees this industry as important. Not only because this industry saves life, but it is a major source of revenue. To ensure better growth, government has encouraged the development of new technologies for the treatment of deadly diseases like cancer and tuberculosis. To achieve this, the government of India has raised the Foreign Direct Investment (FDI) for brownfield pharma investments to as high as 74 percent with the approval of the government. And for the greenfield pharma investments, the FDI cap was raised to a full 100 percent.

How will pharma industry get affected?

The initial call is that except the life-saving essential medicines, the rest of the medicines are set to get costlier under the GST regime. The council mentioned which drugs will fall under which slab of GST rates. The tax slab rate are as: 0 percent, 5 percent, 12 percent, 18 percent, and 28 percent.

According to the government, the life saving Active Pharmaceutical Ingredients (APIs) has been put under the 5 percent slab, some of the other APIs at 18 percent and the formulation has been kept at 12 percent. For your information: Pharmaceutical Ingredient or an API is the major raw material that goes into the production of a formulation.

On the other hand, most medicines have been listed under the 5 to 12 percent bracket, which is not a major change from what the situation is now. Currently, in the pre GST regime, exempted medicinal products are being levied with a VAT of about 5.5 to 6.5 per cent while other pharmaceutical products are been levied with a total tax (inclusive of VAT) of around 11.5 to 12.5 per cent.

GST will offer the irreplaceable tax credit options, allowing a seamless flow of tax credit, and a hefty decrease in the hassles of compliance and its costs. Overall. it will lead to a decrease in transaction costs and a lower manufacturing cost.

The machines used for making pharmaceuticals will get cheaper because the duty levied on this will be available as tax credit. So the machines will see more imports, and will lead to overall cost in the technology sector, because it will be a one-time investment where you own the product.

Also, like other industries, one of the other big advantages to the pharma industry will be the resurrection and the remodeling of the supply chain, that stands majorly flawed at the moment. The archaic Cost and Distribution Model will be replaced by the merits of an improved supply chain system. This is because the Central sales tax will no longer be levied on products, since the GST subsumes all the taxes into one. Also, the second reason is that India will have no internal borders after the implementation of GST. Interstate transactions between the dealers are set to become neutral and independent of geographies.

Since all of this will lead to more revenue and profits, the companies will be willing to experiment and invest in the strategic supply chain and distribution model. The implementation of GST will leave a big impact on the warehousing strategy. As of now, the companies have their warehouses in different states to avoid the Central Sales Tax of different states. But once GST is live, this tax will no longer exist and the companies can afford to keep the warehouses in the same state, placing them at strategically decided locations to only pay the Integrated Goods and Services TAX (IGST). This will lead to an overall improved efficiency and reduced manufacturing costs, which will be a function of lower costs in transport.

What are the negatives?

With the good, there are bound to be the bads. Goods and Services Tax will be levied on different phases of the supply chain, and hence, as it stands, it will have an adverse effect on the free drug samples, bonus schemes, transfer of stocks between the states.

There is no reduction in tax incidence. Kanchana TK, the Director General with the Organization of Pharmaceutical Producers of India (OPPI), said,

“The research-based pharmaceutical industry was hopeful that there would be a reduction in the tax incidence on pharmaceutical product.”

Is such a reduction was done, medicine prices would have reduced and it would have impacted patients in a positive way

Inverted duty structure unresolved

Inverted duty structure means that the import duty on the finished items are lower than the import duties on the raw material. Under the GST regime, APIs will have a GST rate of 18 percent and the formulation has been kept at 12 percent. Now this does not solve the issue.

For long, the pharma sector has seen accumulation of credit because of the higher rate of excise duty on API and a lower rate of excise duty on the manufacture of formulation. Government has tries to offer a solution though. There is a refund mechanism in place now under Goods and Services Tax. The refund is in the form of input credit but when the internal experts of the industry spoke out, they were clearly not happy with what the government had to offer.